NASD fines banks for IPO allocations

LuisaBeltran

NEW YORK (CBS.MW) - The NASD Tuesday censured and fined three banks for violating rules by doling out shares of hot IPOs to certain customers in exchange for their agreeing to pay exorbitant commissions.

The NASD reprimanded three banks --Morgan Stanley, Bear Stearns and Deutsche Bank - and ordered them to pay a total combined fine of more than $15 million. Bear Stearns
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will pay $4.95 million, Deutsche Bank
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will pay $5.29 million and Morgan Stanley
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will pay $5.39 million

The banks violated NASD rules when they gave certain clients shares of some hot IPOs. In late 1999 and early 2000, each of the banks acted lead or co-lead manager of various popular initial offerings.

Customers who obtained shares in the offerings stood to make substantial profits. Many of the new issues opened at substantial premiums, sometimes 50 percent or more above their IPO price, the NASD said.

The banks accepted high commissions, many times more than the typical rate of 6 cents per share. The customers paid the high commissions within one day of having received shares in a hot IPO.

"None of these firms was providing unusual or extraordinary services to justify these very high commissions," said Mary Schapiro, the NASD's president of regulatory policy and oversight. "There was no legitimate reason to pay these firms millions of dollars more than other firms would charge to carry out routine trades."

The banks, in accepting the fines, did not admit or deny guilt.

The act

From late 1999 to early 2000, Morgan Stanley acted as lead or co-lead of 26 IPOs. Nineteen of the offerings jumped by more than 70 percent in the aftermarket, the NASD said.

Morgan Stanley received $4.9 million in unusually high commissions during this period. For example, the bank allocated 1,000 shares of Webmethods to one customer at the IPO price of $35 a share. Webmethods closed its first day of trade at $212.65 a share. If the customer had sold their shares, he would have realized a profit of $177,625, the NASD said.

On that same day, the customer paid Morgan Stanley a $60,000 commission for executing a 20,000 share trade of Tiffany and Co. at $3 a share. That commission totaled $58,800 more than the 6 cents a share typical rate, the NASD said.

"We're very pleased to have voluntarily resolved this matter," a Morgan Stanley spokeswoman said Tuesday.

Similarly, Deutsche Bank acted as lead manager of 16 IPOs during the time period, including Foundry Networks and Fairmarket. Seven of the new issues surged 50 percent above their offer price on their first day of trade.

Deutsche Bank allocated 25,000 shares in the Fairmarket IPO to one unidentified customer. Fairmarket increased by more than 185 percent in its first day.

The customer paid Deutsche Bank 95 cents a share to conduct six trades of highly liquid listed securities. The next day, the same customer paid Deutsche Bank 30 cents a share to execute six additional trades, the NASD said.

"This resulted in a commission of $1.06 million greater than if the customer had paid a commission rate of 6 cents per share," the NASD said.

A footnote to Frank Quattrone

The NASD's action follows the trial earlier this month of Frank Quattrone, where a jury convicted the former star investment banker of obstruction of justice and witness tampering. Quattrone sent an email in December 2000 encouraging CSFB employees to "clean up" their files, while the investment bank was on notice of a federal investigation into the bank's allocation of IPOs. See full story.

Quattrone, who led some of the high-flying IPOs of the dot.com boom, including Amazon.com
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and Cisco Systems
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worked at Morgan Stanley and Deutsche Bank before joining CSFB. He will be sentenced in September.

In 2000, the NASD, the Securities and Exchange Commission and the U.S. Attorney's office were investigating CSFB
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for allegedly allocating shares of hot IPOs to gain investment banking business. In January 2002, CSFB paid $100 million to settle allegations of improper allocation of hot IPOs.

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